U.S. stocks rose for the week, after back-to-back slides in benchmark indexes, on optimism lawmakers will reach a deal to avoid a government default and Janet Yellen won’t withdraw stimulus soon as Federal Reserve chairman.
Alcoa (AA:US) Inc. rose 4.5 percent for the week after marking the unofficial start of the third-quarter earnings season by beating estimates. Hewlett-Packard Co. rallied 7.2 percent after saying it expects to return more cash to shareholders and sees revenue stabilizing following a multiyear decline. Gap Inc. plunged 9.1 percent as same-store sales missed analysts’ estimates.
The Standard & Poor’s 500 Index gained 0.8 percent to 1,703.20 over the five days, regaining its losses since the government’s partial shutdown that started Oct. 1. The Dow Jones Industrial Average advanced 164.53 points, or 1.1 percent, to 15,237.11. Both gauges fell during the previous two weeks.
“The proposal for a short-term increase in the debt ceiling buys time and clearly avoids potential default near-term,” Terry Sandven, the Minneapolis-based chief equity strategist at U.S. Bank Wealth Management, said in a phone interview. He helps oversee $112 billion. “The broad equity market will be in a holding pattern in part because the issues remain and we still need to find out what the final resolution will be.”
The S&P 500 jumped 2.2 percent on Oct. 10, the most since Jan. 2, as a House Republican proposal emerged for a short-term increase in the debt ceiling. The index slumped 2.1 percent in the first two days of the week as concern grew that a deadlock among lawmakers over the debt limit would lead to a government default.
Without an increase to the debt ceiling, the U.S. will exhaust its borrowing authority on Oct. 17 and would run out of funds to pay all of its bills sometime between Oct. 22 and Oct. 31, according to the Congressional Budget Office. The Treasury Department said Oct. 3 that a default could have “catastrophic” consequences that might last decades.
The last time President Barack Obama and Congress sparred over whether to raise the debt ceiling, in August 2011, S&P stripped the U.S. of its AAA credit rating. The S&P 500 fell more than 11 percent in three days. The losses were later reversed, as the Fed (FDTR) pledged to hold the benchmark interest rate near zero and maintain bond purchases to support the economy.
Equities also gained in the latest week after Obama nominated Janet Yellen, the current Fed vice chairman, to succeed Ben S. Bernanke as head of the central bank. As a top deputy to Bernanke, whose term expires Jan. 31, Yellen supported the central bank’s bond-buying programs that have helped propel the S&P 500 up as much as 155 percent from a 12-year low in March 2009.
The benchmark index jumped to a record on Sept. 18 as the Fed unexpectedly refrained from reducing its $85 billion monthly bond-buying program, saying it wants more evidence of an economic recovery before scaling back stimulus.
“If we get past this uncertainty, if we know that Yellen’s going to come in and likely do what Bernanke has done, if there’s only going to be one tapering this year and it’s going to be small in magnitude, well I think there’s a lot more upside for the markets,” Kevin Mahn, president and chief investment officer at Hennion & Walsh Asset Management, said in a phone interview from Parsippany, New Jersey. He helps manage $2 billion.
Investors were whipsawed by volatility in the market during the week. The S&P 500 dropped 1.2 percent on Oct. 8, followed by the 2.2 percent rally two days later.
The Chicago Board Options Exchange Volatility Index (VIX), the gauge of S&P 500 options prices known as the VIX, surged 22 percent in the first two trading days, before tumbling to end the week down 6.1 percent at 15.72.
Seven out of 10 main industries in the S&P 500 rose as utilities and consumer-staples companies advanced at least 1.7 percent to pace gains. Consumer discretionary shares fell 0.4 percent for the biggest drop. Consumer sentiment in the U.S. fell in October to a nine-month low on concern about the government shutdown and debt-ceiling debate, data released Oct. 11 showed.
With few economic reports available because of the shutdown, investors are focusing on third-quarter corporate earnings. Profits for companies in the S&P 500 probably increased 1.4 percent during the three months while sales rose 2 percent, according to analysts’ estimates compiled by Bloomberg.
“The most important things for the stock market continues to be earnings and interest rates,” Gene Peroni, portfolio manager at Advisors Asset Management Inc., said in a phone interview from Conshohocken, Pennsylvania. His firm oversees more than $12 billion. “While the market can be unsettled from time to time by geopolitical factors or political goings on here at home, those two factors continue to be squarely bullish for the market going forward.”
Alcoa rose 4.5 percent to $8.32 for the week. The aluminum producer’s third-quarter earnings exceeded analyst estimates as its smelting business returned to profitability and results improved at a unit that makes auto and aerospace parts.
Hewlett-Packard Co. rallied 7.2 percent to $22.80. Chief Executive Officer Meg Whitman is contending with declining sales from slack demand for personal computers and stepped up competition in the business-technology market. While analysts are projecting a 3 percent drop in 2014 sales, according to data compiled by Bloomberg, Whitman said she expects “revenue to stabilize.”
Hewlett-Packard shares have jumped 60 percent in 2013, after reaching their lowest in a decade in November.
Johnson & Johnson climbed 2.5 percent to $89.45 as the seller of health-care products was raised to neutral from sell at Goldman Sachs Group Inc.
Darden Restaurants Inc., owner of the Olive Garden and Red Lobster dining chains, rose 8.1 percent to $50.50 for the largest advance among S&P 500 companies. Barington Capital Group LP took a stake in the company to press for changes.
Gap plunged 9.1 percent to $36.83 and L Brands (LTD:US) Inc. lost 9.3 percent to $56.31. Both retailers posted September same-store sales that missed analysts’ estimates as a lack of new products and a choppy economy encouraged shoppers to restrain spending. L Brands, which owns the Victoria’s Secret and Bath and Body Works brands, was downgraded by Credit Suisse Group AG to neutral from outperform.
Yum! Brands Inc. retreated 6.3 percent to $67, its biggest weekly drop since April 5. The owner of the KFC fast-food chain chain said third-quarter profit fell 68 percent and cut its 2013 earnings forecast as same-store sales dropped in China.
Citrix Systems Inc. lost 16 percent to $59.08 for the steepest decline in the S&P 500. The technology company reported preliminary third-quarter earnings that missed analyst estimates.
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